Joint Labor Search and the Taxation of Couples

Abstract

We study the effects of joint progressive taxation on employment and wages when labor markets are frictional, building an equilibrium random-search model with two-worker households and incomplete asset markets. Households jointly decide on search effort off- and on-the job, voluntary quits, and consumption and savings. Firms post vacancies in anticipation of households’ choices. We calibrate the model to the U.S. data and study counterfactual tax reforms. When faced with single filing and lower progressivity, employees search harder as gains from climbing the job ladder are greater. This increases wages and decreases expected duration of filled jobs. Less progressive tax system encourages more savings which prompts the non-employed to search less intensely due to a negative wealth effect. As a result, firms create fewer vacancies and non-employment increases. Joint paper with Leo Kaas, Bastian Schulz, Nawid Siassi.